Netbooks Impacting the Mainstream Market

Joe Wilcox, editor of Microsoft Watch, has put together an in-depth article about the impact netbooks are having on the traditional, or mainstream, laptop/notebook market.

Netbooks are cannibalizing the low-end part of the market and driving some margins down (in the so-called “race to the bottom”). Just how much they are is up for debate – I think once we’ve seen another quarter or two, and factor in the MSI Wind U100 and Acer Aspire One launch during the first half of last year, then we’ll have a better idea on just what kind of impact they are having. eWeek considers this a huge problem for the overall PC market, and they believe the Microsoft must be a part of anything that addresses this. They mention the first quarter 2009 shipment information that was just released by both Gartner and IDC, and PC shipments declined by 6.5 percent over this time last year, while netbooks/sub-notebooks sales were strong. I think some of that is being alarmist – even if netbooks didn’t exist, shipments would probably still be down. Companies are cutting back, and within the last few years, laptops have reached a point as far as cost versus computing power, where the benefits of upgrading fairly often for consumers has dropped substantially. It’s one thing if you are going from an old Celeron or Pentium 4-based laptop from 5 years ago to a Intel Core 2 Duo-based system, it’s another if you are already on a Core Duo or Core 2 Duo-based system. I think we’ve reached the point where people aren’t going to be compelled to upgrade as often. On top of that, you have Microsoft Windows 7 which is going to perform as well or better on existing systems that were sold with Vista (and it performs just fine on Intel Atom-based systems).

I think that it is a problem for manufacturers, but at the same time, the damage is done. It’s very clear that these devices are something that consumers are very interested in, and in many cases, they are being bought by people who may not already own a laptop for one reason or another. I can also see the fear that the NVIDIA Ion platform inspires in some – a low-end netbook/ultraportable, perhaps powered by an Intel Atom (or a VIA Nano), capable of HD graphics (even just 720p). That would absolutely impact the traditional 15″ (and now 17″) budget market. Netbooks with their current, outdated graphics systems, are already impacting the market – the demand was there, and the products to fill it simply didn’t exist, at least at a pricepoint that was affordable by mainstream consumers. As we go forward, you’ll find more people willing to forego the 15″ laptops for something in the 13″ and below range. eWeek mentions a couple of solutions. One is advertising, only it’s not what you think – they think that manufacturers (and Microsoft) need to be pushing premium ($1,000+) laptops in their advertising. That sounds good on paper, but there’s a problem, and it ties into what I’ve said below. The manufacturers can just ignore netbooks when it comes to advertising, but the retailers aren’t.

The other proposed solutions is to break out netbooks from the mainstream laptop/notebook market. It doesn’t make a lot of sense given that the big-box retailers such as Wal-Mart, Best Buy, Office Depot, Office Max, etc., are not going to physically do that, at least not in a way that’s harmful to netbook sales. If anything, in recent weeks, I’ve noticed more and more displays at mainstream retailers that are prominent in laptop areas (including endcaps) or they are clustered together in their own sections, such that attention is drawn to them. Some of those displays/endcaps maybe special arrangements made with netbook manufactuers as well, and the stores aren’t going to give those up. These stores are also prominently mentioning them in their advertising (which goes against eWeek’s advice of going after larger budgets).

I think a lot of these stores see these devices right now as a second or third machine in the home – the email/web browsing machines that was the target for this segment of the market. On top of that, with the economy the way it is, they maybe going after people for whom this is their first laptop, or that are wanting a new machine, but on the fence about costs. Some retailers also have a vested interest in getting you into any laptop, whether it’s a 10″ netbook or a 15″ laptop, because they may have areas where they can make up the margin (such as extended service agreements, secondary installs/upgrades, etc.).

eWeek’s solution on breaking out netbooks from the mainstream market is to bundle them with mobile data service plans (similar to AT&T’s netbook mobile data plans). That sounds like an excellent solution to the problem, and it has the potential to work well (since it can be attractive up front), but right now, at least in the US, the costs can be prohibitive. Most mobile data plans I’ve seen are capped at 5GB and get very expensive, very quickly, when you go over that cap. If you happen to be in a household where there is an iPhone (or smartphone with a data plan), you are also basically buying a second data plan which can add substantially to the mobile/cell phone bill.

I can see how netbooks can be a threat to manufacturers, but by the same token, manufacturers can add “premium” features to these devices and price them higher (up into the low-end mainstream laptop territory). Take the Asus Eee PC T91 Touch for instance. Add a touchscreen and you’ve got a feature that you can price at a premium, while still keeping it low enough to be affordable to many people, especially people who haven’t been exposed to “convertible” and touchscreen laptops. Higher resolution displays (which both HP and Dell are doing, and which Sony captured perfectly with the VAIO P series.

In fact, I would consider the VAIO P to be a shining example of how companies can compete in this market, while still maintaining a healthy margin. It’s not for everybody, but it’s going to be highly desirable to quite a few people, and you have the GPS options, etc., on top of that.

I also think that at some point, netbooks, in the 10″ – 12″ range, should, for all intents and purposes, be considered the low-end/budget part of the laptop market. Drop “netbook” from the description (since they are rapidly evolving to a point where they won’t simply be something made for browsing the web) and just go with it. Take the 13″ – 15″ laptops and make them substantially more desirable, especially as a desktop replacement, drop the cheapest 13″ – 15″ models and just fill that gap with what we now call laptops.